Bank of England boosts banks' campaign to soften key capital rule

LONDON, July 7 (Reuters) - Global banking lobby groups campaigning to soften a key rule on bank capital got a boost this week when the Bank of England recommended amending these regulations.

The rule, known as the leverage ratio, is being finalised by the Basel Committee of global bank regulators and is due to come into effect from 2018.

It aims to bolster banks' financial strength and measures a bank's capital against its total assets.

But banks say the leverage ratio could end up becoming the main determinant of capital requirements, rather than the backstop that it is designed to be.

The Bank of England, among the more hawkish regulators since the 2007-09 financial crisis and a Basel member, expressed concern on Tuesday about the way ratio is calculated.

In its current form, the leverage ratio "may act to discourage market making activity", and there was merit in amending it, the BoE said in its twice-yearly Financial Stability Report.

Six banking and markets bodies on Thursday called on the Basel Committee to revise their proposals for the ratio, saying they share the BoE's concerns.

The ratio is too inflexible when it comes to what should be included in calculating it, five banking and markets groups said in a joint statement.

"It is vital that the leverage ratio is calibrated in a way which does not constrain efficient financing for economic growth and job creation," Tim Adams, president of the Institute of International Finance said in a joint statement with four other industry bodies.

One of the criticisms of the leverage ratio is that it will hit liquidity in financial markets. Central banks are already worried about the impact of lower liquidity on the ability of markets to ride out shocks without freezing up.

"The proposals will result in lower liquidity on transparent central markets, leading to higher spreads, lower volumes, more volatility and greater systemic risk," Nandini Sukumar, chief executive of the World Federation of Exchanges said separately on Thursday.

Basel has already sought to allay concerns by fixing the first global leverage ratio at 3 percent for the vast majority of banks across the world, sticking with the preliminary level agreed at the height of the financial crisis.

It has also softened some of its other rules as policymakers switch focus from crisis-era reforms to getting more bank credit into sluggish economies to revive growth.

In May, Japan's Financial Services Agency, also a Basel member, warned that the leverage ratio should not be the main determinant of bank capital. (Reporting by Huw Jones. Editing by Jane Merriman)